15 June 2020

Since 20 April 2020, individuals affected by the COVID-19 pandemic have been eligible to withdraw up to $10,000 of their super until 30 June 2020 and a further $10,000 after 1 July 2020. You can find out more about your eligibility here.

The consequences of early super withdrawal have suffered some fairly negative press since its announcement. Estimates ranging from $50,000 to as high as $200,000 have been thrown about as the potential cost to the retirement nest egg of someone withdrawing $20,000 from their superannuation at the age of 20.

While I agree it is prudent to be mindful of the financial consequences of making an early withdrawal from your super, I also caution being scared away from accessing a measure that may be in your best interests.

What is Superannuation? And what is the actual effect of withdrawing it?

A common misconception is superannuation is a type of investment, or a faceless sum of money which you get access to once you retire.

Superannuation is simply a tax structure where investments such as shares, cash, bonds, term deposits, and more can be held.

These investments are professionally managed on your behalf by the institution you have entrusted with your savings. But you can invest in the same underlying investments outside of super as you can inside of super.

Assuming your money can also be managed by professionals in the same way outside of super (and therefore can earn the same rate of return), the only difference between investing inside of super compared to outside of super is tax and fees.

Superannuation is concessionally taxed, compared to what you pay personally. The accumulation phase of super is taxed at 15 percent on income generated by investments. Otherwise, income generated by investments held outside of super is taxed according to your tax bracket below:

2019/20 financial year:

The above rates do not include the Medicare levy of 2%.

We have excluded the differing taxes on capital gains for simplicity.

Early withdrawal – Limitations in the publicised consequences:

I believe there is a potential flaw in some of the publicised consequences of an early superannuation withdrawal. Often these estimates show the long-term consequences of spending $20,000 rather than withdrawing it from Super.

Intuitively, these may seem like the same thing. However, money withdrawn from super is not necessarily expended. It can be put to other uses such as repaying (or avoiding the need to incur) credit card debt, personal loans, or even used for investment outside of Super.

We will explore these scenarios in more detail below:

Should you withdraw your Super to invest personally?

Generally, no.

We have assumed the same rate of return both inside and outside of Super in this example to demonstrate the long-term tax benefits of Super.

Impact of investing $20,000 until age 67*:

If you are withdrawing Super during a period of financial hardship, tying up your money in investments may also restrict your ability to fund living expenses.

Should you withdraw your Super to repay a personal loan or credit card?

Generally, yes.

Wouldn’t this “hurt your retirement nest egg”?

Generally, no.

Remember, your “retirement nest egg” isn’t just your Superannuation.

Impact of withdrawing $20,000 to repay a credit card or personal loan**:

You can claim a tax deduction for putting your money back into Super

Don’t forget, you can put your money back into super once you’re back on your feet. In fact, there may be large benefits in doing so.

Not only will this “lock in” the savings realised in the example above, but you are also able to claim a tax deduction on your superannuation contribution.

Claiming a tax deduction for putting money into super is known as a concessional contribution. There is a concessional contribution limit of $25,000 per annum.

Your employer super and salary sacrifice are also concessional contributions and therefore count towards this cap.

Concessional contributions are taxed at 15 percent when they enter your super, but your tax deduction is generally worth much more. For someone earning between $37,000 and $90,000, it could be as much as 34.50 percent.

Impact of depositing $20,000 (out of pocket) back into Super as a concessional contribution*** :

There is a reason that the title above says, “out of pocket”, and the contribution amount is $30,534.35. This is because after you receive your tax savings of $10,534, you are only out of pocket $20,000, which is what you initially withdrew.

The table above illustrates that_you can effectively deposit $25,954 after tax into your superannuation by only using $20,000 of your out of pocket savings, when factoring in your tax savings._

TIP: The recently legislated “catch up concessional contribution” rules may allow you to contribute more than your $25,000 limit if you did not use up your $25,000 cap in the prior financial year and had a balance of less than $500,000 on the previous 30 June.

TIP: You can spread the deposit over two financial years to avoid breaching your $25,000 limit or to keep your deduction at a higher tax bracket.

This brings your total savings from repaying your credit card and contributing back into Super as a concessional contribution to$15,381after five years.

Should you withdraw Super to pay off your home loan?

Generally, no

With interest rates at record lows, the investments in your superannuation generally earn a higher rate of return than the interest you pay on your home loan over the long term.

Impact of withdrawing $20,000 to pay off your home loan†:

What about repaying your investment property?

Even worse

The interest incurred on your investment property is generally tax deductible, unlike the interest incurred on your home loan.

This makes the benefit of repaying this debt even lower than your home loan.

Perhaps ask the bank for a repayment holiday instead.

Impact of withdrawing $20,000 to pay off your investment property loan††:

To discuss any of these strategies in more detail, get in touch with one of our Wealth Management team who can provide more information and assistance.

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* Assumptions:

• Rate of return of seven percent per annum (all income) in both super and outside of super:

- Super admin fees are offset by access to wholesale funds with lower fees.

• Personal tax rate of 34.50 percent including Medicare levy.

• Inflation of two percent.

• The values are expressed in today’s dollars (discounted by inflation).

** Assumptions:

• 5.95 percent super earnings (after tax).

• 13 percent credit card or personal loan interest rate.

• Two percent inflation.

• No principal repayments have been factored into the repayment of the personal loan or credit card

*** Assumptions

• Contributions are done over two financial years, so the limit is not breached.

• Marginal tax rate of 34.50 percent.

† Assumptions:

• Interest rate of 4.50 percent.

• Super after-tax earnings of 5.95 percent.

• Inflation of two percent.

†† Assumptions:

• Interest rate of 4.50 percent.

• Interest tax deductible in full at marginal tax rate of 34.50 percent including Medicare levy.

• Super after-tax earnings of 5.95 percent.

• Inflation of two percent.

Important Information

The information contained is of a general nature only and does not take into account your objectives, financial situation or needs. You should consider whether the information is suitable for you and your personal circumstances. Before you make any decisions in relation to a financial product, you should obtain and read the relevant Product Disclosure Statement or information statement. You should seek personal financial advice before acting on any material.

This content is also not intended to constitute legal or taxation advice as it is of a general nature only. If you require financial, legal or taxation advice, we recommend you speak to a qualified adviser.

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